Tax Season: Put An Expert on Your Team

TAXTIME. It’s that
time of year when some small business owners are scratching their heads
wondering, “Should I have done things differently?” “Should I have
waited to buy that new truck? Am I taking all the deductions I should?
Am I taking some that I shouldn’t? What if I’m audited? Will I be
ready?” This anxiety could be replaced by a single question: “Do I have
the right tax partner?” Success in small business depends not only on
your own talents but on your ability to assemble the right cast of
associates to keep your company running smoothly and profitably. The
person you choose to help with your tax planning and preparation is a
critical member of this cast.

Preparation or planning

You have
some choices when it comes to choosing a tax service, but it’s important
to remember that tax preparation and tax planning are two different
things. Here are some of the options:

Tax preparation service: A basic tax
prep service offers trained professionals who can correctly complete
your returns at a fairly low cost. This might be an option for an owner
with a simple return who is strictly looking for help with tax
preparation—not for ongoing advice and guidance.

Enrolled Agent

(EA): EAs are rigorously
trained as tax specialists and must pass an extensive test administered
by the IRS. They are licensed by the federal government to represent
taxpayers before the IRS and are required to take a number of hours of
continuing education courses each year in the area of taxation. Because
their business and training is all about taxes, they are usually experts
at it. If your needs are limited to the area of taxes, an enrolled
agent might be a good option.

Certified public accountant

(CPA): A CPA with
expertise in taxes can offer tax planning, tax preparation and more. A
CPA can serve as a year-round business partner and consultant not just
for tax reduction but for all of the financial aspects of your company.
This can be invaluable for a busy green industry entrepreneur who
doesn’t have time to focus on small financial details or on the big
picture indicators of the company’s financial wellbeing. Keep in mind,
however, that not all CPAs specialize in taxes, and some are better
trained in this area than others. Finding one who specializes in taxes
and other services for businesses like yours is the goal.

Tax attorney: Tax
attorneys are lawyers who are extensively trained in tax law. They can
provide tax planning and strategic business consulting and can also help
with other legal aspects of running a business. Tax attorneys are also
bound by attorney-client privilege, meaning they cannot testify against
their clients.

While
cost is always a factor in any business decision, make sure to look at
more than up-front fees when choosing your tax and financial advisor. A
tax advisor whose fees seem more expensive at first might make up for
this many times over in the money he or she saves you over the long run.

Many businesses opt to
use a CPA for a full range of financial guidance and services.

“Taxation is important, but
it’s just one component of managing a successful small business,” says
Michelle Cote, CPA, Dennis & Associates P.C., a Quincy,
Massachusetts firm that specializes in working with small businesses.
“It’s also important to understand the laws surrounding payroll, state
tax and sales tax. A CPA will handle all of those things.”

CPAs can help companies
identify problems and make strategic decisions. “Owning a business is
all about staying competitive while understanding the risks of the decisions you’re about to
make,” says Cote. “A CPA will focus on the entire business.”

Choosing a
tax-friendly business structure

One important decision a tax advisor can help
with is your company’s business structure. Are you operating as a sole
proprietor, an LLC, an S-Corp or a C-Corp? There are important tax and
liability issues associated with this decision.

Sole proprietorship offers
the advantage of simplicity without the additional costs involved in
creating another business structure. Becoming an LLC, S-Corp or C-Corp
adds varying layers of complexity and cost, but each of these entities
has its own tax advantages, depending on the situation. All offer
protection of your personal assets in the event your company is sued.
For a contractor with a lot to lose in an industry where many things can
go wrong, this is definitely worth some thought.

A qualified tax advisor
with a thorough understanding of your company, your individual
circumstances and your future plans can walk you through the different
scenarios to guide you toward the best business entity for you.

“This helps eliminate a lot
of problems later on,” says Randy J. Elder, a Phoenix, Arizona CPA who
works with many small businesses. “People have a tendency to set up
their business based on what a friend did or what someone else suggests,
but this isn’t always the best solution for their individual situation.
For example, time after time, I see people who have set up an LLC that
may or may not be necessary. You really need to take some time and go
through your situation carefully.”

Deductions and credits

It’s hard enough for tax
professionals to stay abreast of the intricacies of the tax code; it’s
nearly impossible for business owners to do it and run a successful
company, too.

Did you hire a low-income
teen to boost your summer workforce? There’s a credit for that, too. How
will the jobs bill impact your company? Did you set up a SEP or SIMPLE
plan for your employees? Are you using alternative fuels or upgrading
your heating or air conditioning system? You may be entitled to more
credits.

Hiring an
advisor with knowledge of your company and the tax laws can easily pay
for itself in identifying all the credits and deductions you’re entitled
to.

Planning

Nearly every business move
you make can have positive or negative tax consequences. Without proper
advice, you’re liable to miss out on important planning that can save
big tax dollars.

“There
are a lot of different ways to minimize taxes in any given year,” says
Elder. “One example is when it comes to writing off equipment you’ve
purchased.”

For
example, if it’s near the end of the year, and you’re planning to buy
several pieces of office equipment, your tax advisor can examine your
tax outlook to help you determine whether it’s better to buy now or wait
until the next tax year.

When you do buy the equipment, he or she can also
determine the most advantageous way to expense it. It may have the best
impact on taxes if you take the entire expense the year you bought the
equipment. Or it may be better to depreciate it over several years.

A tax planner can also
help clients pay estimated taxes in the most advantageous way. “For
example, if a business is having an exceptionally good year but cash is
tight, it may make more sense for them to pay a safe estimate rather
than what is actually owed,” says Elder.

They’ll have to pay the actual taxes later but
will have more cash to work with now. On the other hand, if they’re
having a poor year, it may make more sense to pay the actual taxes owed
rather than the safe estimate.

Cote says one planning error business owners often
make is waiting until the last minute to set up a pension plan they can
contribute to before the tax year’s deadline. A tax advisor can help you
sort through your options so you can establish a plan before the
eleventh hour.

Record keeping

Bad
record keeping can sabotage your efforts to take all the deductions
you’re entitled to and can make audits very uncomfortable.

“Some owners are so busy
doing everything, they think they just don’t have time,” says Elder.
“They’re more interested in bringing revenue in to keep the business
going and they don’t take time to do the daily record keeping. It becomes
an afterthought or they try to do it in the evening when they’re done
with work. After an exhausting day, it gets put off. That’s when they
usually call me.”

The
use of automobiles is one area where some owners fall short.
“Regulations dictate that you need a log for cars you use in a business
environment,” says Cote. “That’s sometimes an area where
clients are lax. Some want to estimate, but the law doesn’t allow that.”

Co-mingling funds is
another sloppy business practice that makes tax time difficult.

“Get a separate checking
account,” says Elder. “A lot of people are still operating with their
personal checkbook. Once you decide to file as an S-Corp, you can’t
co-mingle funds. If you formed a one person LLC, co-mingling your funds
may not seem like a big deal, but you really should keep it separate. It
makes tax time significantly easier and less expensive because the
person doing the work won’t have to put as much time into it.”

Red flags

Your tax advisor can help
you sort out reasonable practices from big red flags. For example, if
you’re incorporated, it’s important to pay yourself a reasonable wage.
Taking a salary that’s too small or one that’s too large can both raise
eyebrows at the IRS.

“Another thing the IRS looks at is your style of living,” says
Elder. “Can you afford your style of living based on what you’re
reporting? If it’s way out of line from national averages, that can flag
an audit.”

While a
home office is sometimes thought of as a red flag, small business
owners shouldn’t be afraid to deduct these expenses if the office meets
the IRS definitions. A good tax advisor will guide you in deducting your
legitimate home office legally and confidently.

No matter what type of tax
partner you choose, make sure it’s one who has experience with companies
like yours. This doesn’t necessarily mean they have to have extensive
experience within the green industry, but that they work with service
industries of a similar size.

“There are quirks with various industries, but I think
it’s more important to find someone who has experience in public
accounting with all types of businesses,” says Elder. “What you really
need is someone who will listen to you and take the time to answer your
questions.”

“Most
CPA firms like ours don’t just look at the corporate side of business,
we look at the individual side, too,” says Cote. “Sometimes these are
very interrelated. For example what a business owner’s spouse does for
work might impact what we decide to do on the corporate level. It also
matters for pension planning.”

Success in the business game depends in great part on
the quality of your team. Make sure you have an expert tax advisor on
yours.